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Chapter 1

The Government and Not-for-

Profit Environment

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Basics

Describing governments & nonprofits

Governmental characteristics

Nonprofit characteristics Standard-setting: GASB & FASB

Financial Reporting

Users

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Describing Governments &

Nonprofits US governments: federal, state & local Branches: legislative, executive & judicial

Constitution: federal vs. state jurisdiction

Nonprofits: over 1.5 million organizations, $1.3trillion in assets

Nonprofits: colleges & universities, hospitals,voluntary health & welfare organizations, other

Nonprofits: importance of IRS & tax-exemptstatus

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Characteristics of Governments

& Nonprofits No profit motive Ownership interests are nontransferable (&

usually not defined)

Fund accounting recommended Differential GAAP

Emphasis of accountability of resources & flowof these resources

Unique revenue sources

Often lack of direct cost/benefit relationships

Importance of budgeting

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Government Characteristics

Federal Government: Broad jurisdiction, 2000receipts $1,958 billion; 2000 outlays $1,781billion

50 states: jurisdiction defined in Constitution,establishes legal roles of local governments

87,453 local governments: 3,043 counties;

36,001 cities; 13,726 school districts; 34,683special districts

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Other Governmental Financial

Characteristics Ability of governments to levy taxes Use of modified accrual; revenues & expenditures;

budget entries Financial operations may be restrictedone reason for

fund accounting Power to issue tax-exempt debt (e.g, municipal bonds) Intergovernmental financial relationships (importance of

intergovernmental revenues) Overlapping jurisdictions & overlapping debt

GASB 34: addition of government-wide statements (fullaccrual) & other reporting requirements

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Nonprofit Characteristics

Importance of IRS & tax-exempt status

Nonprofits must file for tax-exempt status:charities are recognized as 501(c)(3)organizations, based on filing Form 1023

Annual report, Form 990, must be followedusing IRS format

Other nonprofit categories also exist See www.irs.ustreas.gov/

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Purpose of Financial Reporting

Assess financial condition (operatingresults & financial resources)

Compare actual results with the budget Legal compliance

Evaluate performance (especially

efficiency and effectiveness; service effort& accomplishment)

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Governmental Financial Reports

Comprehensive Annual Financial Report(CAFR)--two levels of reporting: (1) government-wide (full accrual), (2) fund accounting (modifiedaccrual for governmental funds)

Annual Operating Budget(s) Other documents: for citizens or media;

specialized reports, etc. Most governments have well-developed web

pages Note importance of interperiod equity

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Users of Governmental

Financial Reports Executives & employees Governing Boards (legislative function)

Investors & Creditors (importance ofmunicipal bonds; credit-rating agencies)

Taxpayers & voters

Regulatory agencies (e.g., TexasEducation Agency for Texas ISDs)

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Standard Setting

Financial Accounting

Foundation

Financial AccountingStandards Board

(1973) [Non-profits]

Governmental AccountingStandards Board

(1984) [Governments]

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Standard Setting History

Government GAAP initially established by NationalCouncil of Governmental Accounting (NCGA); GASBestablished in 1984

Nonprofit GAAP initially established by industry: (1)

colleges & universities, (2) NP hospitals, (3) otherAICPA would write two audit guides (voluntary health &welfare organizations & other); FASB took overjurisdiction in the 1980s.

Federal government establishes its own standards,through the Federal Accounting Standards AdvisoryBoard (FASAB)

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Chapter 2

Fund Accounting

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Fund Accounting

What is a Fund? The government ornonprofit is the economic entity. The fundis the fiscal & accounting entity. Eachorganization usually has several funds.Each fund is a separate self-balancing setof accounts. A major reason for funds is

control purposes, both legal & fiscal

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Funds Used by State & Local

Governments Governmental Funds: also called source &disposition funds or expendable funds. Mostgovernmental activities are financed through

these funds. Proprietary Funds: also called business-type

funds, which handle most activities financedthrough user charges.

Fiduciary Funds or trust & agency funds, wheregovernment acts as trustee or agent

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Governmental Funds

General Fund: primary operating fund; bydefinition it accounts for all activities not requiredfor another fund. The General Fund is used for

unrestricted operations. Special Revenue Fund: specific revenue sourceused for a specific purpose. This is an operatingfund.

Capital Projects Fund: Used specifically for theacquisition & construction of capital assets.

Debt Service Fund: Used for funding & paymentof interest & principal on long-term debt.

Permanent Fund: New-required by GASB 34

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Proprietary Funds

Enterprise Funds: provide services to the publicon a user-fee basis. The most common categoryis government-owned utilities; also, mass transit,

airport, housing authorities, government-ownedhospitals, etc.

Internal Service Fund: provide services to otherdepartments in the same government, such as

motor pool, data processing, or suppliespurchasing.

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Fiduciary Funds

Pension Trust Funds: provide retirement benefitsto governmental employees

Permanent private-purpose trust funds:

endowments to benefit other organizations orindividuals; e.g., student scholarships

Agency Funds: temporary accounting for assetsheld for other governments or organizations, taxcollected for other governments

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Financial Reports

The complete annual report is theComprehensive Annual Financial Report(CAFR).

The three sections are: Introductory Section,Financial Section, & Statistical Section.

Governments also prepare annual operatingbudgets & may have capital budgets & otherstatements.

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CAFR (Old Format)

Introductory Section: includes transmittal letter &may include Certificate of Achievement,organization chart, table of contents, etc.

Financial Section: includes Auditors Report;Combined Financial Statements, Notes; &statements by fund category.

Statistical Section: various tables & otherinformation on economic, demographic &supplementary fiscal data.

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CAFR (GASB 34 Format)

Same basic format with the followingadditions:

Management Discussion & Analysis(MD&A) added to Introductory Section.

Government-wide Financial Statementsadded, based on full accrual accounting

(1) statement of net assets & (2) statementof activities.

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Chapter 3

Issues ofBudgeting & Control

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Budgeting

The Current Operating Budget (also called anappropriation budget): a plan of financialoperations for the period. The annual budget

authorizes, and provides the basis for control of,financial operations during the year (NCGAStatement #1).

The Budget is a formal expression of publicpolicy on objectives & priorities & how theresources will be provided to meet them (NCGAStatement #1).

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Functions ofBudgets

Planning: type, quantity & quality of services tobe provided & how to pay for these services.

Control: budgets insure that resources are

available & are used to monitor compliance withlegislative spending authority.

Review: budgets can be compared to actualresults to evaluate whether legislative & otherlegal mandates were carried out, as well aseffectiveness & efficiency.

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Types of Annual OperatingB

udgets Traditional Budget: classifies spending by lineitem (object classification), which focuses oncontrol. Appropriations specifically limits

spending on each line item. Performance Budget: use measurable units of

SEA.

Program Budgets: budgets are defined byprograms, based on specific objectives for eachidentified program.

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The Budget Cycle

Budget Preparation (several months before thestart of the fiscal year)

Legislative Approval (before the start of the fiscal

year) Fiscal Year Operations (Budget Execution)

Feedback & Review (after the end of the fiscalyear)

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Budget Preparation

Chief financial officer (CFO) accumulatesbudget requests based on chief executiveofficer (CEO) & City Council objectives,

along with revenue forecasts to develop aproposed budget.

Inputs: revenue forecasts, expenditurerequests & priorities

Outcome: proposed (executive) budget

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Legislative Approval

Legislature must approve the budgetbefore taxes can be levied &appropriations spent.

Considerations: tax levy(ies), bond (&other borrowing) initiatives, budgetauthorization & mandate

Outcome: annual operating budget (thisprocess & the budget is publicly available)

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Fiscal Year Operations (Execution)

Budget journal entries begin the new fiscalyear accounting & operations depend onthese budget entries.

Actual revenues & expenditures

Budget revisions & transfers

Adjusting & closing process

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Feedback & Review

Reporting & auditing: financial reports areprepared & audited

CAFR is issued Other analysis conducted: budget to actual

comparisons, service effort &accomplishment, etc.

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Budget Entries

Revenue-related: Debit estimated revenues &Credit fund balance.

Expenditure-related: Debit fund balance & credit

Appropriations. Operations: revenues are credited when

measurable & available & expenditure debitedwhen corresponding liability is recorded.

Both budget & actual entries are closed out atyear-end.

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Encumbrances

Encumbrances are journal entries used torecognize future commitments (such aspurchase orders) & earmark these funds for

control purposes. When commitments are recognized (e.g., for

approved purchase orders) debit encumbrances& credit fund balance reserved for

encumbrances.

Encumbrances are reversed when expendituresare recognized for the commitments.

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Chapter 4

Recognizing Revenues in

Governmental Funds

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Revenues

Basis of Accounting [when transactions/eventsare recognized]: Modified Accrual Accounting inthe Governmental Funds.

Measurement Focus [what is being measured]:Current (expendable) financial resources.

Revenues are recognized when measurable &available.

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Revenue Recognition

Revenue must be measurable & available. Measurable: amount is known or can be

reasonably estimated.

Available: physically available: collected incash during the fiscal year or shortly thereafter(60 day rule for property tax); legally available(e.g., levied or can can be spent based oncontract or regulation).

Note: importance of nonexchange revenues (pp.123-4).

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Resource Inflows

Revenues are recorded by source:Property TaxesSales Taxes

Licenses & permitsFines & ForfeituresIntergovernmental GrantsOther

Other Financing Sources are resource inflowsthat include transfers in, bond proceeds, etc.

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Nonexchange Revenues

Imposed nonexchange revenues: assessment onindividuals or businesses; e.g., property taxes & fines.

Derived tax revenues: taxes derived from exchangetransactions, such as sales & income taxes.

Government-mandated, such as a state requiring a cityto use resources for specific purposes.

Voluntary: contractual agreements such as contributionsfrom donors.

Note time & purpose limitations (these usually must bemet before revenues are recognized).

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Simplified Budgeting Strategy

(Local Governments) Estimate spending needs. Forecast all revenues except property tax.

The difference is the amount that has tobe collected from property taxes.

Calculate property tax rates (based on net

assessed value & collection estimates) &total tax levy.

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Budget Strategy Example (1)

Property Tax Anticipated spending needs = $800,000;forecasted revenue, all sources exceptproperty tax = $200,000; then revenuecollected from property tax = $600,000.

Assuming that 92% of property tax iscollected (assume no delinquent tax

collection) then tax levy = 600,000/.92 =$652,174 for a balanced budget.

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Property Tax Net assessed value: assume total assessedvalue of property is $2.3 billion less propertyexemptions of $300 millionnet assessed value

= $2 billion. Tax rate: property tax required / (collection rate x

net assessed value/100) = 600,000 / (.92 x 2billion) = $0.3261 per $100 NAV.

Tax levy = $2 billion/100 x 0.326087 =$652,174.

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Journal Entries Budget entry (balanced budget):Estimated Revenues 800,000

Fund Balance 800,000

Tax Levy:Taxes Receivable [Current] 652,174

Revenues-Property Tax

600,000 Allowance for Uncoll. Tax52,174

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Closing Entries Fund Balance 800,000Estimated Revenues 800,000Revenue-Property Tax 600,000

Fund Balance600,000

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Other Revenues

Fines (pp. 129-130) Sales Taxes (pp. 130-3) Income Taxes (pp. 133-5) Grants (pp. 135-142)

Unrestricted Grants

Restricted Grants (designated purposes)Contingent Grants (based on specificactions or occurrences)

Entitlements (entitled by formula)Shared Revenues (on a predetermined basis)Payments in Lieu of Taxes (replaces property taxes)

Sale of capital assets (pp. 142-3) Investment Income: investments recorded at fair value & investment

income includes changes in fair value (pp. 143-7).

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Other Financing Sources

Resource inflows that include transfers in &bond proceeds.

They are operating inflows, but not consideredrevenues.

Monies are often transferred from one fund toanother; e.g., the General Fund transfers$10,000 to the Debt Service Fund for an interestpayment: this is an other financing sources to

the DSF. Bond proceeds (usually to a Capital ProjectFund) also are other financing sources (themoney has to be paid back).

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Government-wide Statements

In addition to fund accounting, state & localgovernments prepare government-widestatements based on full accrual accounting.

Generally, the government keeps its books using

fund accounting, then makes an additional set ofadjusting entries to arrive at the information toprepare government-wide statements.

Therefore, revenues are recognized on a

different basis, similar to commercial accounting. Generally, the major difference is that availableis not a criteria for revenue recognition.

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Chapter 5

Recognizing Expenditures in

Governmental Funds

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Expenditures

Expenditures are associated with the acquisition of goods &services (usually recognized when the liability is recorded).Expenditures are decreases in net financial resources.

Expenses are associated with the consumption of goods & services.Expenses are decreases in net economic resources.

Expenditures are used instead of expenses in the governmentalfunds. [Expenses are used for government-wide statements.] The acquisition of equipment for $10,000 cash in a general fund

would be:Expenditures-Capital Asset 10,000

Cash 10,000

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Resource Outflows

Expenditures are usually cross-classifiedby (1) department or program (e.g., publicworks, public safety, parks & recreation) &(2) object of expenditures (e.g., salaries,supplies, maintenance, etc.).

Other financing uses are resource

outflows, with transfers out being the mostcommon.

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Expenditure Characteristics

Mainly associated with exchange transactions;e.g., employee compensation, acquisition (oruse) of supplies.

Examples:Wages & Salaries (pp. 164-171)Supplies (pp. 173-5): purchase orconsumption methods allowed

Capital assets (pp. 176-180)Non-exchange transactions (pp. 183-4)

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Spending Entries (1): Budget

Spending needs: salaries, $650,000;supplies, $150,000.

B

udget entry:Fund Balance 800,000Appropriations 800,000

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Spending Journal Entries--Salaries

Salaries:Expenditures-Salaries 642,000

Salaries Payable 642,000

Year-end accruals: at year-end,expenditures are recognized for the daysworks for which they havent been paid.

Expenditures-Salaries 8,000 Accrued Salaries 8,000

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Other Salary Considerations

Vacation Pay: recorded in year vacation actuallytaken [accrued for government-wide reporting].

Sick Leave: recorded in year sick leave taken

[accrued for government-wide reporting.] Pension contributions: generally recorded when

cash payment made to a pension trust fund[recorded as expenses based on calculatedamount for government-wide reporting

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Spending Journal Entries--Supplies

Supplies (Purchase method)Encumbrances 150,000

Reserve for Encumbrances 150,000

Reserve for Encumbrances 150,000Encumbrances 150,000

Expenditures-Supplies 150,000Vouchers Payable 150,000

[Note: supplies on hand at year-end total$10,000.]

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Spending Closing Entries

Appropriations 800,000Fund Balance 800,000

Fund Balance 800,000Expenditures-Salaries 650,000Expenditures-Supplies 150,000

Inventory-Supplies 10,000

Fund Balance Reservedfor Supplies 10,000

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Supplies-Consumption Method

[Encumbrances, same as above.]

Supplies Inventory 150,000Vouchers Payable 150,000

Expenditures-Supplies 140,000Supplies Inventory 140,000

Fund Balance 10,000Fund Balance Reservedfor Supplies 10,000

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Prepayments

Prepayments are common for insurance &certain other spending items; GeneralFund (& other governmental funds) can

use the purchase or consumption method.

Purchase method:Expenditures-Insurance 10,000

Vouchers Payable 10,000

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Prepayments-Consumption Method

Prepaid Insurance 10,000Vouchers Payable 10,000

Usage (usually by month):

Expenditures-Insurance 3,000Prepaid Insurance 3,000

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Capital Assets

Expenditures-Capital Assets 20,000Contracts Payable 20,000

If the money is on a long-term note:Cash 20,000

Other Financing Sources-Note proceeds 20,000

Expenditures-Capital Assets 20,000Contracts Payable 20,000

Capital Lease:Expenditures-Capital Assets 20,000

Other Financing Sources-Capital Lease 20,000

[Note: long-term liabilities are serviced in a debt service fund.]

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Multiple-fund Transactions

Many transactions involve more than one fund;therefore, journal entries are required in two ormore funds.

A common example in interfund transfers(classified as other financing sources & uses).Other examples of financing sources & usesinclude proceeds from long-term debt &proceeds from the sales of capital assets.

Note that charges for services would berecorded as revenue & expenditures (orexpenses).

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Interfund Transfer

The General Funds sends $20,000 in cashto the Debt Service Fund for a futureinterest payment on long-term notes:

General FundTransfers Out 20,000

Cash 20,000

Debt Service FundCash 20,000

Transfers In 20,000

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Chapter 6

Accounting for Capital Projects &

Debt Service

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Fund Purpose

Capital project & debt service funds aregovernmental funds used for specific purposes.

The purpose of capital project funds is to acquire& use the resources dedicated to acquire or

build specific capital projects (e.g., buildings,roads, etc.).

Debt service funds are used to acquire & usefinancial resources to pay interest & principal onlong-term debt associated with the governmentalfunds.

Both funds use modified accrual accounting.

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Characteristics of Capital ProjectFunds (CPFs)

Capital projects are generally funded using long-term municipal (tax exempt) debt to fund capitalprojects.

Debt covenants usually require resources to beused exclusively for the specific capital projectsfunded.

Capital projects usually are budgeted throughcapital budgets & may not require annual budgetentries (this varies from one government toanother). The primary reason for budget entriesis for control.

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Basic Journal EntriesCapital Project Funds (2)

Signing of construction contract for $50,000:Encumbrances 50,000

Reserve for Encumbrances 50,000

Construction is completed & contractor paid$50,000:

Reserve for Encumbrances 50,000Encumbrances 50,000

ExpendituresConstruction 50,000Cash 50,000

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Basic Journal EntriesCapital Project Funds (3)

Closing entries:Appropriations 50,000

Estimated Bond Proceeds 50,000

Bond Proceeds 50,000Expenditures-Construction 50,000

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Other CPF Issues

Bond Premiums & Discounts; issue costs.

Bond premiums are usually recorded asother financing sources & transferred todebt service funds (note: a multiple fundentry).

Other sources of funding including grants,

transfers from other funds, & investmentearnings.

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Characteristics of Debt ServiceFunds (DSFs)

Debt service funds primarily service the long-term debtassociated with acquiring capital assets in CPFs.

Cash is usually transferred in from the general fund (orother fund). Other possible resources include taxes

payable specifically to the DSF & investment earnings, Interest is most often paid semi-annually

Many of the bonds are serial bonds, where some amountof principal is repaid annually.

Also, long-term notes & capital leases.

Interest & principal are recognized as current liabilities inthe DSF in the period they must be paid.

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Basic Journal EntriesDebt Service Funds

Nonreciprocal transfer from the general fund (note: a multi-fundtransaction) for the payment of interest, $10,000:

Cash 10,000Transfers In (other financing

sources) 10,000 Payment of interest, $10,000:

Expenditures-Interest 10,000Matured Interest Payable 10,000

Matured Interest Payable 10,000Cash 10,000

Closing entry:Transfers In 10,000

Expenditures-Interest 10,000

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Basic Journal EntriesDebt Service Funds (2)

Nonreciprocal transfer from the general fund (note: a multi-fund transaction)for the payment of interest, $10,000, & principal, $160,000:

Cash 170,000Transfers In (other financing

sources) 170,000 Payment of interest & principal, $170,000:

Expenditures-Interest 10,000Expenditures-Principal 160,000

Matured Interest Payable 10,000Matured Bonds Payable 160,000

Matured Interest Payable 10,000Matured Bonds Payable 160,000

Cash 170,000 Closing entry:

Transfers In 170,000Expenditures-Interest 10,000Expenditures-Principal 160,000

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Other DSF Issues

Budget entries can be used.

Transfer in of premium on bonds from aDSF (an other financing source recordedas a nonreciprocal transfer).

Investing cash in investments &recognizing revenues from investments.

Recognizing tax revenues (the sameprocess as with the General Fund).

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Government-wide Statements

Full accrual: includes all assets &liabilities

Construction costs are accumulated asconstruction in progress & capitalized inthe financial statements.

Debt Service: principal payments reduce

liabilities; interest is an expense (& isaccrued).

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Special Assessments

This is usually associated with construction projectsassociated with specific property owners (e.g., to buildsidewalks), with construction costs charged to theseproperty owners as special assessments (either with one

lump payment or over time). The construction activity would be accounted for in aCPF.

If the government is obligated for the debt (which isusually the case), the debt is paid through a DSF. If the

government is not obligated (that is, the property ownersare obligated), the debt is serviced in an agency fund.

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Debt Refunding

Governments can retire debt before maturity(e.g., using callable bonds).

When governments retire debt early & replace itwith new debt, this is called bond refunding.

Major reasons include lower interest rates onnew debt, changing the maturity structure, &eliminating certain restrictive covenants.

In-substance defeasance: an advance refundingwhen the borrowing satisfies the obligationseconomically, but not legally (e.g., placingrequired funding in trust or escrow). Costs &benefits would normally be recorded in a DSF.

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Chapter 7

Long-lived Assets & Investmentsin Marketable Securities

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General Capital Assets

General capital assets (essentially property,plant & equipment) are not-financial &associated with the government as a whole.

Since they are non-financial, they are notaccounted for in specific funds (which have afinancial resources focus).

Capital assets include land, buildings,equipment, improvements other than buildings,construction in progress & infrastructure assets(e.g., roads & bridges).

A ti f G l C it l

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Accounting for General CapitalAssets

Acquisition or construction of capital assets isrecorded as an expenditures in a governmentalfund (e.g., capital projects fund). The asset isnot capitalized. [Trade-in transactions arereported as expenditures at their net of trade-incost.

Governments must maintain records of capitalassets.

Government-wide reporting: reported athistorical costs less accumulated depreciation,plus notes with additional information.

Sh ld G t R t

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Should Governments Report onInfrastructure Assets?

Controversial issue; historically, governments couldchoose whether or not to accounting for infrastructureassets. GASB emphasizes the importance of cost ofservices.

Traditional approach (GASB 34): expenditures ingovernmental funds; capitalize the costs & recorddepreciation in the government-wide statements.

Modified approach (government-wide statements):capitalize but do not record depreciation; instead,expense preservation costs (which extend the useful life

of the assets). Importance of maintenance: governments must disclosemaintenance costs for a 5-year period & comparisons ofrequired maintenance to maintain a specific condition.

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Impairment of Capital Assets

An asset is impaired if its service utility hasdeclined significantly.

Governments should test for impairment (GASB

42), using one of three methods:1. Restoration cost approach (cost torestore asset utility).

2. Service-units approach (% declinein service units).

3. Deflated depreciation replacement costapproach (estimate new carry value).

I t t i M k t bl

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Investments in MarketableSecurities

Governments invest in stocks, bonds & other marketable securities,primarily because they can accumulate large amounts of cashtaxcollections, bond proceeds before construction is completed & paidfor, etc. [Pensions & endowments will be discussed later.]

Investments can include repurchase agreements (usually withbroker-dealers & derivatives. Governments can use resource pools

(e.g., managed by the state). Investments are recorded at fair value; investment

income includes changes in fair value. According to GASB 40, governments must disclose information on

risks: credit risks of investments (e.g., bond ratings), investmentsconcentration (greater than 5% of total investments), interest rate

risks, & foreign currency risks.

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Chapter 8

Long-term Obligations

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Information on Long-term Debt

Financial information should provide informationon resources & obligation.

Key issues are credit risk & fiscal stress. Governments rarely go bankrupt, but essential

services must go onfiscal stress may makeproviding adequate services problematic.

General long-term debt includes bonds, notesspecial assessments.

General obligation (GO) debt is backed by thefull faith & credit of the government (& its taxingpowers).

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Accounting for Long-term Debt

Long-term debt is not included ingovernmental fund statements.

However, governments must maintain aschedule of long-term debt.

Long-term debt is included in government-wide statements, similar to commercial

accounting.

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Government-wide Journal Entries

GO bonds issued at par:

Cash 500,000Bonds Payable 500,000

Interest is paid on Bonds:

Interest Expense 15,000Cash 15,000

Interest & principal is paid on debt:

Interest Expense 15,000Bonds Payable 50,000

Cash 65,000

Premiums & discounts would be amortized over the liveof the debt (i.e., present value is used).

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Other Types of Debt

Demand bonds: permit the investor to demandredemption early; are classified as long-term debt (if anappropriate take-out agreements exists)

Bond Anticipation Notes (BANs): short-term notes issued

& will be shortly replaced with long-term debt. Usuallyclassified as long-term debt (appropriate legal steps forrefinancing must take place).

Tax anticipation notes (TANs) & revenue anticipationnotes (RANs) are classified as short-term.

Revenue bonds are backed by specific future revenues& usually issued by Enterprise Funds.

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Capital Leases

Governments can issued both capital &operating leases (same definitions ascommercial accounting).

When issued for governmental purposes:Expenditures-capital asset

Other Financial Sources-CL

The interest & principal payment in DSF:Expenditures-InterestExpenditures-Principal

Cash

Capital Lease Government wide

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Capital LeaseGovernment-wideStatements

Recognize capital lease:Capital Asset (Under CL Obligation)

Capital Lease Obligation

Lease payment:Capital Lease ObligationInterest Expense

Cash

Annual depreciation:Depreciation Expense

Accumulated Depreciation

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Industrial Development

Local governments (including Bryan & CollegeStation) make substantial efforts to encouragenew business to locate in the local area.Incentives can include tax abatements,

government-funded land and/or buildings, etc. Governments can issue debt for the benefit ofnon-governments, called conduit debt. Thiswould have the lower interest rate ofgovernment debt, but be serviced by the non-

governmental entity. Long-term bonds for thispurpose are called industrial developmentbonds.

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Overlapping Debt & Debt Margin

Specific local governments have overlapping geographicjurisdictions with other governments: a city is located within acounty, there may be a school district & any number of specialdistricts.

Particularly important is overlapping debt: the obligations of propertyowners for a share of the debt of all these governments.

Most government prepare a schedule of direct (the debt of thatgovernment) & a % share of the debt of overlapping governments(see pp. 290-1).

Governments may be limited for the amount of long-term debt theycan incur, called debt margin. This is usually calculated as a % ofnet assessed value. If the debt margin is 5% of NAV & NAV is $315

million, then debt margin is 5% x 315 million = $15.75 million.

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Bond Ratings

Ratings of Moodys & Standard & Poors are the most common.Moodys ratings:

AAA is the highest ratingBAA-AAA are investment grade ratingsBA-C are below investment grade (junk bonds). It is difficult forgovernments to issue junk bonds

Interest rates depend on bond ratings (& other factors), with interestrates the lowest for the highest rated bonds.

Bond issuers can buy bond insurance from Municipal BondInsurance Association (MBIA) & other insurers. The premium canbe large (up to 2% of principal & interest) for governments with highcredit risk, but the result is a AAA bond rating by Moodys & likely

lower interest rates.

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Chapter 9

Business-type Activities

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Proprietary Funds

Most business-type activities of state & localgovernments are recorded in Proprietary Funds.

Enterprise Funds provide goods & services for topublic & charge for these services. Examplesinclude electric, water, sewage, & trash utilities;certain airport services, land fills, etc.

Internal Service Funds provide goods & servicesto other governmental departments & charge forthese services. Typical services includecomputer services, motor pool & maintenance,copying, etc.

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Accounting Model

Proprietary Funds use full accrual accounting:revenue is recognized when earned; expensesare used & matched to revenue; capital assetsare capitalized & depreciated; & long-term debt

is recorded. Categories: operating revenues(esp. charges for services), operating expenses,& non-operating revenues & expenses (e.g.,interest).

Why: those activities involve exchangetransactions, primarily direct charges for goods& servicesthe basic focus of full accrual.

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Financial Reporting

Fund Accounting: statement of net assets;statement of revenues, expenses &changes in fund net assets; & statement of

cash flows. Government-wide statements: Proprietary

Fund amounts are recorded in a separate

columns for the statement of net assets &statement of activities.

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Cash Flow Statement

Based on GASB Statement 9; somewhatdifferent than for commercial firms.

Cash Flows from Operating Activities

Cash Flows from Noncapital FinancialActivities

Cash Flows from Capital & Related

Financing Activities

Cash Flows from Investing Activities

Internal Service FundsTypical

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Internal Service FundsTypicalEntries

Data processing ISF:

1. ISF is established from a cash transfer(equity/nonreciprocal) from the General Fund,$100,000.

Cash 100,000[Equity] Transfer In 100,000

2. Computer is purchased for cash, $95,000.

Equipment 95,000Cash 95,000


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Internal Service FundsTypicalEntries (2)

Salaries are $35,000 less withholding of $3,800& Social Security of $2,7000 (due to FederalGovernment).

Operating Expenses-Salaries 35,000

Due to Federal Govern. 6,500Salaries Payable 28,500 General Fund is billed $41,000 & Enterprise

Fund, $19,000.Due From General Fund 41,000

Due From Enterprise Fund 19,000Operating Revenues-Charges for Services 60,000


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Internal Service Funds TypicalEntries (3)

Depreciation is recorded for $9,500.Operating Expenses-Depreciation 9,500

Accumulated Depreciation 9,500

Closing Entryequity transfer usually closed toinvested capital.[Equity] Transfers In 100,000Ops. Rev.-Char. For Serv. 60,000

Ops. Exp.-Salaries 35,000

Ops. Exp.-Depr. 9,500Invested in Capital Assets 100,000Net Assets-Unrestricted 21,500

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Self-Insurance

A government can self-insure through an InternalService Fund.

Generally, premiums would be paid from the General &other Funds, based on actual losses or an actuarial

method or historical cost method. Premiums would berecorded as a credit to operating revenues (expenditurein the General Fund).

Claims (losses) would be recorded an asset has beenimpaired or a liability incurred & the amount can be

reasonably estimated. The amount would be charged asa debit to Operating Expenses-Claims.

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When to Use an Enterprise Fund

Governments can use an Enterprise Fund when itcharges fees to external users for goods & services.

An Enterprise Fund is required when it is financed solelyby revenue debt (plus other criteria).

Example: a citys pool complex is funded by bothcharges for services & specific taxes. It could possibly beaccounted for in an Enterprise Fund or a SpecialRevenue Fund. The city can use an Enterprise Fund,but must use it if the construction was funded exclusively

by revenue bonds.

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Typical Entriesa Utility Fund

Charges for service to non-municipal customers of$950,000 & the General Fund of $10,000:

Accounts Receivable 950,000Due From General Fund 10,000

Operating Revenues 960,000(Charges for Services)

Provision for Uncollectible accounts was increased by$2,000.

Operating Expenses-Bad Debts 2,000

Allow. For Uncollect. AR 2,000 Salaries payable of $85,000 are recorded.Operating Expenses-Salaries 85,000

Salaries Payable 85,000

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Typical Entriesa Utility Fund (2)

Customer deposits of $8,400 were collected. [Note: there are othermethods].

Cash-Restricted 8,400Customer Deposits 8,400

Interest on revenue bonds of $18,000 was paid.

Non-operating Expense-Interest 18,000Cash 18,000 Liabilities were recognized for purchase of supplies, $14,000 and

construction in progress for plant assets, $56,000.

Supplies Inventory 14,000Construction in Progress 56,000

Accounts Payable 14,000Contracts Payable 56,000

C it l C t ib ti

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Capital Contributions

The primary source of capital is an equity (non-reciprocal) transferfrom the General Fund (called Invested in Capital Assets orContributed Capital).

Other sources of capital may be from contribution from othergovernments & contributions from developers & others. Forexample, developers may put in streets, sidewalks, etc. & then

contribute these assets to the government. Note that all transfers or contributions would be first recorded in

the operating statement (statement of revenues, expenses &changes in net assets).

Other capital contributions include tap fees (charges to customers tohook up to the utility system (e.g., water or electricity).

Net accumulated earnings (Retained Earnings) are generallyrecorded as Unrestricted Net Assets.

R t i t d A t

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Restricted Assets

Unlike commercial firms, utilities (& otherproprietary funds) may have aconsiderable number of restricted assets.

Cash for customer deposits is usuallyrestricted.

Revenue bonds may include a number ofasset (& other) restrictions, including useof bond proceeds & cash set-asides forthe repayment of principal and/or interest.

L dfill A ti

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Landfill Accounting

Government-owned landfills are usuallyaccounted for in an Enterprise Fund (assumingthat the primary funding if from user charges).

Operating costs must include the future costs forclosing the landfill & required monitoring. The

journal entry for this is:Landfill Expense

Liability for Landfill Closure(see pp. 322-325).

Combined vs. Consolidated

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Combined vs. ConsolidatedFinancial Statements

Fund accounting statement are combined; thatis, the accounting is by fund which includeddouble accounting for various transfers,

charges for services, etc. Government-wide statements are consolidated;

that is, the double counting is eliminated.

Note also that Internal Service Fund activity is

normally included in the government-widestatements under Governmental Activities.

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Chapter 10

Fiduciary Funds & PermanentFunds

Fid i F d

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Fiduciary Funds

Fiduciary funds account for assets held by thegovernment in a trustee capacity or as an agent for otherindividuals or entities.

Endowments (non-expendable trust funds): principalmust remain intact; earnings are to be used for the

purpose designated by the donor. Extendable trust funds: similar to endowments, but

principal can be used for the purpose designated by thedonor.

Pension Trust Funds: defined benefit retirement funds

for the benefit of government employees Agency Funds: custodian or clearing accounts wherecash & related resources are held for otherorganizations.

P t F d

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Permanent Funds

Permanent Funds are endowments or othernonexpendable trust funds where the donorspecifies that the earnings (& perhaps principal)are to be used to benefit the government; for

example, to buy library books for the city libraryor support a government-owned museum.

These are governmental funds, using modifiedaccrual accounting.

Earnings are often transferred to a SpecialRevenue Fund.

Journal Entries for a Permanent

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Jou a t es o a e a e tFund

Individual establishes an endowment of$900,000 in cash to buy library books forthe city library.

Cash 900,000Endowment Contributions 900,000

Equity investments are bought, $900,000.

Common Stock 900,000Cash 900,000


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Fund (2)

Cash dividends are received, $18,000.Cash 18,000

Revenue-Dividends 18,000

Stock increase in value $12,000.Common Stocks 12,000

Revenue-Investments 12,000


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Fund (3) Fund is closed out at year-end & earnings

transferred to a Special Revenue Fund.Revenue-Dividends 18,000Revenue-Investments 12,000

Earnings Available to SRF 30,000Transfer Out 30,000Cash 30,000

Endowment Contributions 900,000Earnings Available to SRF 30,000

Transfer Out 30,000Fund Balance-Endowment 900,000

Earnings Issues with Permanent

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gFunds

A percentage of earnings may bemaintained in the endowment tocompensate for inflation, usually

calculated as an annual percentage (seepp. 366-7).

An alternative to distributing earnings is afixed return approach, distributing a fixed

percentage based on expected long-termreturn (see pp 363-4).

Should All Investment Gains &

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Losses be Distributed?

There is no definitive answer based onGAAP.

This may be specified in the trust

agreement or a specific requirement bythe government holding the endowment.

Trust Fund Accounting Issues

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Trust Fund Accounting Issues

Endowments (& expendable trust funds) wherethe earnings benefit other individuals or groupsare accounted for as Trust Funds.

Trust Funds use full accrual accounting;generally, the accounting is similar to thePermanent Funds.

There are some differences relative toPermanent Funds, such as accruing interest

before its received in cash & depreciating anycapital assets used for the fund.

Types of Pensions

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Types of Pensions

Defined contribution plans: employers &/oremployees make tax deductible cash (or stock)contributions to the employees retirement

planthe government has no furtherobligations.

Defined benefit plans: employer agrees to fundthe employees retirement, usually based on

final salary & length of service; the governmenthas complete responsibility for the obligation &substantial accounting is required.

Pension Accounting Issues

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Pension Accounting Issues

Governments may account for theirdefined benefit pension plans (often PublicEmployee Retirement System or PERS).

The pensions of local governments areoften run by the state as a separatesystem, such as CalPERS.

The accounting is different than for

commercial accounting (GASB 25 & 27 vs.FASB 35, 87 & others).

Pension Accounting Issues (2)

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Pension Accounting Issues (2)

The two major components are (1) the planassets which are invested in stock, bonds &other earnings assets (using fair value) and (2)

the pension obligations associated with current& future retirement-related payments.

The difference between the assets & liabilities isthe net assets availablewhether the plan is

over- or under-funded is a key factor for analysis

Pension Contributions

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Pension Contributions

A major issue is the amount of pension contributionscalculated each year, based on actuarial assumptions &other issues. The calculation includes normal cost plusa provision for amortizing the unfunded actuarial accruedliability.

Normal cost is the portion of the present value ofpension plan benefits allocated to this fiscal year bysome actuarial method (6 methods are alloweddetermined by actuaries, not the accountants).Unfunded actuarial accrued liability includes transitionallosses, actuarial losses, improvements in pensionbenefits, & special termination benefits (see p. 375).

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Reporting Pension Costs (2)

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Reporting Pension Costs (2)

Journal entryGeneral Fund:Expenditures-Pension 90,000

Cash 90,000 Journal entryEnterprise Fund:

Operating Expense-Pension 98,000Cash 90,000Net Pension Obligation 8,000

Governmental funds recognize only the cashcontribution; note that the net pension obligation

is included in the Government-wide statements;Proprietary Fund record the entire obligation.

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Agency Funds

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Agency Funds

Agency funds are custodial, where thegovernment acts as an agent for other funds orgovernments; thus, serving as a conduit for cash& other financial assets.

Agency funds are commonly used when onegovernment collects the taxes for allgovernments within its jurisdiction & remits thefunds to those governments (e.g., a countymaintains the property tax records for all local

governments in the county). Pass-through grants are commonly allocated

through Agency Funds.

Agency Fund Accounting

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Agency Fund Accounting

Only current assets & liabilities are usedthereare no operating entries recorded.

Assume a county collect $5,000 in cash for thecity & $3,000 for the school district in cash for

property tax. The entry would be:Cash 8,000Due to City 5,000Due to ISD 3,000

When remitted in cash:

Due to City 5,000Due to ISD 3,000

Cash 8,000

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Chapter 11

Reporting, Disclosure & FinancialAnalysis

Reporting Issues

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Reporting Issues

The Reporting Entity: what must beincluded in the CAFR?

Financial Reporting: what information is

included in the CAFR?

Financial Analysis: what information isuseful to evaluate the government? Issues

include relative efficiency, servicesprovided vs. taxes, & fiscal stress.

Primary Government

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Primary Government

Primary government: government unit thatis issuing a CAFR.

It is legally separate & fiscally independent

from other governmental units. Fiscallyindependent means it has the authority todetermine its budget, levy taxes & set

rates, & issue bonds

Component Unit

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Component Unit

Component unit: a legally separate government,but the elected officials of a primary governmentare financially accountable & can impose theirwill; or the component unit can provide specialbenefits or impose specific financial burdens onthe primary government.

Key criteria: primary government appoints a

voting majority of the units governing board or amajority of the units governing body iscomposed of primary government officials.

Financially Accountable

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Component Unit (CU)

Primary government can impose its will; e.g., itcan remove appointed CU members; modify orapprove the CU budget; veto, overrule or modifyCU decisions; hire the CUs managers.

CU benefits or specific financial burdens (the CUis fiscally dependent): primary government isentitled to the CUs financial resources; legally

obligated for the CU deficits, operations or debtobligations.

Reporting Component Units

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Reporting Component Units

Discrete presentation: CUs are reported in onecolumn of the financial statements of the primarygovernment. This is the more common form ofpresentation.

B

lending: combining the CUs operations as if itwere a part of the primary government. Notethat the General Fund of the CU would betreated as a Special Revenue Fund of theprimary government.

Additional disclosures on the CUs can be madein the government-wide statement, notes or incombining statements.

Other Types of Entities

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Other Types of Entities

Joint ventures are contracts that create a newentity to carry out a specific activity (e.g.,construct an airport).

If the funding comes from proprietary fund

resources, the JV would be recorded in aproprietary fund. If the funding comes from agovernmental fund, the JV would be recorded ina governmental fund.

Related government: similar to a CU, but it doesnot meet all the criteria. It is not reported as aCU, but the relationship is disclosed.

Comprehensive Annual Financial

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Report (CAFR)

CAFR has 3 sections:Introductory sectionFinancial section

Statistical section The most recent authority for the

composition of the CAFR is GASB 34.

Introductory Section

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Introductory Section

Table of Contents

Letter of Transmittalusually from the citymanager or CFO, usually focusing on

current operations & fiscal/economicconditions.

Other: Certificate of Achievement indicates

that the CAFR meets the standards of theGFOA.

Financial Section

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Financial Section

Auditors Report (should be an unqualifiedopinion)

Management discussion & analysisa newsection required by GASB 34, with potentially

useful additional information. Financial statements Required supplementary information, including

budget-to-actual comparisons, infrastructurecondition & pension valuation

Combining & individual statements & schedules Statistical data

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Statistical Section

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Statistical Section

Financial trends, including net assets

Revenue capacity, including tax rates, taxlevies & collections, & property values

Debt capacity, including leverage ratios,overlapping debt & debt margin

Demographic & economic data, such aspopulation & per capital income

Operating information such as number ofemployees

Public Colleges & Universities

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Public Colleges & Universities

Are under the jurisdiction of GASB

Are allowed to report as special-purposegovernments engaging only in business-typeactivities; that is, full accrualNote: this is a

choice, not a requirement Using this choice, a college do not need to

present detailed fund statements; the requiredstatements would be a statement of net assets;

statement of revenues and expenses; & astatement of cash flows

Financial Analysis

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Financial Analysis

Analysis of financial condition: will thegovernment be able to finance its services &meet its obligations? Could be useful to voters& taxpayers, as well as debt holders.

Analysis includes detailed review of economic &demographic information, the CAFR (&operating budget), plus additional calculations,trends & ratios that provide additional insight.

See Table 11-5 for a detailed example (pp. 422-424).

Economic/Demographic Factors

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Economic/Demographic Factors

Economic conditions include population,population changes, average income,unemployment rate.

Demographic factors include relative age(especially dependent populationunder16 & over 65) & education levels.

Political factors include the government

structure (e.g., city manager vs. mayor-council for cities), voting characteristics

Overall Financial Characteristics

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Overall Financial Characteristics

Budget information (from operatingbudget): balanced budget, changes fromyear-to-year for both revenues &

spending, obvious problems. Financial statement trends: surplus ordeficit (especially in the General Fund &government-wide), relative fund balance/

net assets (especially in the General Fund& government-wide),

Some Key Ratios

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Some Key Ratios

Fiscal effort, such as own-source revenuesdivided by net assessed value

Adequacy & stability of revenues, such asproperty tax revenue to total operating revenues

& uncollected property tax to total tax levies. Spending patterns, such as expenditures for

specific function divided by total expenditures.

Liquidity & leverage, such as current assets to

current liabilities & long-term debt divided bypopulation.

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Chapter 12

Other Not-for-Profit Organizations

Not-for-Profit Organizations (NPs)

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o o o O ga a o s ( s)

Typical NPs:Colleges & universities (private &public)

NP Hospitals/healthcareVoluntary health & welfareorganizations

All other: churches, labor unions,industry groups, hobby groups,museums, etc.

Accounting Jurisdiction

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Accounting Jurisdiction

Historically, each NP industry developed aseparate set of GAAP; the AICPA issued auditguides & statements of position. To some extent,current AICPA audit guides are authoritative.

The GASB assumed jurisdiction for government-owned NPs (public colleges, government-ownedhospitals, etc.).

The FASB began issuing GAAP for NPs in 1987

(FASB 93) & assumed jurisdiction for all otherNPs. It has not issued comprehensive guidancefor all issues & all NPs.

GAAP Adopting Issues

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G dop g ssues

Voluntary health & welfare & all otheraccounting model developed by AICPA &not much different than commercial GAAP.

NP hospital model developed by AmericanHospital Association, with a unique fullaccrual model. Primary revenue source is

charges for services & generally similar tocommercial accounting.

Adopting IssuesColleges &U i iti (C&U)

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Universities (C&U)

Unique model developed by NACUBO,somewhat similar to governmental model; usedby both public & private C&Us.

Now split jurisdiction: public C&Us under theGASB & private C&Us under the FASB.

Significant issues & problems adopting either aFASB or GASB approach. Public colleges often

account for most activities as Proprietary Funds.

FASB Financial StatementRequirements

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Requirements

Required statements (FASB 117):Statement of financial positionStatement of activities

Statement of cash flows Net assets classified into 3 categories:

Unrestricted net assets

Temporarily restricted net assetsPermanently restricted net assets

Analysis of Net Assets

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y

Most operating resources are unrestricted, such ascharges for services, tuition, unrestricted contributions,and so on.

Resources restricted for a current use are temporarilyrestricted, such as a donor restricted gift to be usedspecifically for scholarships this year.

An endowment is permanently restricted.

Separate fund can be created for temporarily &permanently restricted funds.

See Table 12-1 (pp. 454-5) for a typical presentation.

Disclosing Revenues & Expenses

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g p

Revenues & expenses are reported in a statement ofactivity.

Revenue reporting depends on donor restrictions. Mostrevenues are unrestricted; however, donor-restrictedrevenues are either temporarily or permanentlyrestricted.

All expenses are reported as unrestricted. See Tables12-1 & 2 (pp. 454-7) for financial statements of aVoluntary health & welfare organization (VH&WO).

VH&WOs also report a statement of function expenses,cross-classified by program & support services & lineitem (see Table 12-3, p. 458).

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Restricted Fund Journal Entries

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A gift restricted for a specific purposewould be recorded in a temporarilyrestricted fund; however, all expenses are

recorded as unrestricted funds. If $10,000in cash was donated to provide healtheducation, the entry would be in atemporary restricted fund:

Cash 10,000Revenue from Contributions 10,000

Restricted Fund Journal Entries (2)

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( )

The cash is spent for health education; the cash wouldbe used, while the expense is recorded in theunrestricted fund:

Temporarily Restricted FundResources Released from

Restriction 10,000Cash 10,000

Unrestricted FundProgram Expenses-Health

Education 10,000

Resources Released fromRestriction 10,000

Statement of Cash Flows

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FASB 117 modifies FASB 95 to make cash flowreporting more relevant to NPs.

The same 3 categories are used:Cash flows from operations

Cash flows from financingCash flows from investing Cash flows from financing include contributions

restricted to long-term purposes & interest &dividends from investments restricted to long-

term purposes. NPs are encouraged to use the direct method.

See Tables 12-4 & 12-5 (pp. 460-1).

Contributions

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Contributions are the major source ofrevenue for most VH&WOs. Contributionsare nonreciprocal receipts of assets or

services; that it, the recipient gives nothingin return.

This contrasts to exchange transaction,

the primary revenue source for most NPs,such as NP hospitals.

Pledges

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g

Pledges are unconditional promises tocontribute cash or other assets or services in thefuture.

B

ased on FASB

116, unrestricted pledges arereported as revenue in the period received,based on present value (estimated future cashflows discounted for relative risk). Pledges

expected to be collected within one year neednot be discounted.

Pledges Journal Entries

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g

Pledges of $100,000 are received.$60,000 will be collected this year:

Unrestricted Fund

Pledges Receivable 60,000Revenue from Contributions 60,000

Cash 60,000Pledges Receivable 60,000

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Pledges Journal Entries (3)

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Pledges of $18,000 are collected & releasedfrom TR category:

Temporarily Restricted FundResources Released from

Restrictions 18,000Pledges Receivable 18,000Unrestricted FundCash 18,000

Resources Released fromRestrictions 18,000

For use of PV calculations, see pp. 465-6.

Service Contributions

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When people volunteer their time (services), thisis usually not recorded.

Volunteer services (FASB 116) can be recorded

only if they are profession in nature & the NPwould have to pay for the service otherwise.Assume an accountant donates his/her servicesto audit a NP, valued at $10,000. This would be

recorded (unrestricted) as:Expense-Professional Services10,000Revenue-Contributed Services 10,000

Conditional Promises

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A condition promise means the donor willcontribute only if specific conditions are satisfied.For example, A corporation promises to matchthe contributions on a fund drive for a local

museum. The museum received contributions of$20,000 from other donors. Since thestipulations have been substantially met (FASB116), the corporations matching donation wouldbe recorded (unrestricted):

Pledges Receivable 20,000Revenues-Contributions 20,000

Investment Gains & Losses

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Investment accounting generally follows commercial accounting.Investments are normally recorded as fair value & gains & lossesare recognized. [Note the use of the equity method & marketablesecurities held to maturity as exceptions.]

An unrestricted gain of $1,000 on investment would be recorded as:Investments 1,000

Investment Earnings 1,000(Appreciation in fair value)

Investments associated with restricted resources may be restrictedor unrestricted, depending on the circumstances.

Derivatives usually are recorded at fair value & detailed disclosuresare required, based on SFAS 119.

Charitable remainder trusts are split interest agreements, where theassets are given to the NP, with the stipulation that an annuity ispaid to the donor (& usually the spouse) for the remainders of theirlives & reverts to the NP at their deaths. This is recorded at presentvalue.

Depreciation

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Depreciation on capital assets must berecognized as expense for NPs (SFAS93). The expense is unrestricted, even ifthe capital assets are restricted.

Assume a foundation records annualdepreciation of $5,000. The entry is(unrestricted):

Depreciation Expense 5,000Accumulated Depreciation 5,000

Reporting Entity Issues

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Generally based on AICPA Statement ofPosition 94-3, where the key criteria areexercising significant influence. The importantfactors in the SOP are:

Consolidate when a controlling financialinterest exists (usually based onownership or voting rights).

Consolidate when it has both a votingmajority & an economic interest.

It may consolidate with other means ofcontrol, such as contractual.

Museum Accounting

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Book reviews Museum of American Culture (pp.479-49=87). A museum is an other non-profit.There are few industry-related issues & theaccounting is relatively straight forward.

The museum reports no restricted funds (seestatement of financial position, p. 480).However, there are restricted contributions,

which are temporarily restricted (see statementof activity, p. 485)

Museum Revenues

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Note revenue sources for museum: admissions& memberships are the major source;investment earnings, including gains & losses; &unrestricted & restricted contributions.

Auxiliary enterprises typically are business-typeactivities such as gift shop sales for a museum.These may be accounted for separately, but

summarized in the unrestricted fund for financialreporting.

Museum-Restricted Contributions

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Contributions can be a major revenue source, includingpledges that can be time-restricted & use-restrictedcontributions. These would normally be recorded in thetemporarily restricted fund. See pp. 483-4.

Time-restricted pledges are usually associated with

pledges that will be collected in future periods, but theuse is unrestricted; revenue is recognized in thetemporarily restricted fund, net of uncollectible pledges.When the cash is received the resources are releasedfrom restrictions & available in the unrestricted fund.

Contributions that are use-restricted are recognized as

revenue in the temporarily restricted fund & theresources are released when the cash is used for thedesignated purpose in the unrestricted fund.

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Healthcare Accounting

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Healthcare represents over 15% of GDP &has significant public policy issues.

Most payments are made by third party

providers, including insurance companies,Medicare & Medicaid.

About 15% of the population is uninsured;therefore, bad debts is a significant issue.

Restricted funds are associated primarilyis donations

Healthcare Revenues

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Primary revenue source is patient care revenue,charges for services for routine services, othernursing services, professional services (e.g.,pharmacy, radiology)

Other revenue includes contributions,educational services, & other.

Revenue is reduced by contractual adjustments(negotiated payment schedules with specificthird party payors that are less than the standard

rates). Charity care need not be recorded.

Healthcare Expenses

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The major function categories are nursingservices; other professional services;general, administrative & fiscal services

(including accounting); bad debts;depreciation & interest.

Expenses are cross-classified by object,

including salaries, employee benefits,supplies, etc.

Patient Care Journal Entries

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Basic entry for providing healthcare services for$50,000 would be:

Accounts Receivable 50,000Patient Revenues 50,000

Assume that 30% of these receivables areexpected to be uncollectible:

Bad Debts Expense 15,000

Accounts Receivable-Allowance forBad Debts 15,000

Patient Care Journal Entries (2)

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Hospitals typically negotiate lower rate with specificinsurance companies. Assume that the hospital givescontractual adjustments of 20% to ABC Insurance; thestandard rate charges are $100,000. The entries wouldbe:

Accounts Receivable 100,000Patient Revenues 100,000

Patient Revenues-EstimatedContractual Adjustments 20,000

Accounting Receivable-Allowance

for Contractual Adjustments 20,000

Malpractice

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Malpractice charges can be substantial for hospitals &other healthcare professionals. Generally, healthcareorganizations purchase malpractice insurance, which isrecorded as an expense.

Beyond insurance coverage, malpractice liability is

governed by FASB 5 on contingencies. Liabilities wouldbe recorded if it is probable that a liability has beenincurred & the amount of the loss can be reasonablyestimated.

The journal entry for an estimated malpractice loss of$150,000 would be:

Anticipated Legal Expense 150,000Contingency Liability 150,000

Colleges & Universities (C&U)

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Public C&Us can be accounted for in anenterprise fund (GASB 34).

Private C&Us follow FASB pronouncements,including the use of unrestricted, temporarily

restricted & permanently restricted funds. Because endowments are common in C&Us,

permanently restricted accounts can beextensive.

See Tables 12-11 & 12 for C&U financialstatements (pp. 507-8).

C&U Revenues & Expenditures

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Major revenue categories include: tuition & fees,government appropriations (public), governmentgrants, gifts & private grants, endowmentincome, auxiliary enterprises (e.g., bookstores),

investment gains & losses. Expenses are primarily education & general,

which includes instruction & departmentalresearch, libraries, student services & extension

& public services. Other expense categories aresponsored research, operation & maintenanceof plant (capital assets), & general.

Revenues From Tuition & Fees

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The journal entry for tuition & fees of$500,000 in cash would be:

Cash 500,000Revenue-Tuition & Fees 500,000

Prepaid tuition & fees for a semester in thenext fiscal year would be deferred($25,000):

Cash 25,000Deferred Revenue 25,000

Research Grants

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Most grants reimburse for actual research costs.Assume that expenses total $40,000 on a$100,000 federal grant; the governmentdepartment is notified for reimbursement:

Expenses-SponsoredResearch 40,000

Cash 40,000Due From Federal Govt. 40,000

Revenue-Govt. Grant 40,000

Documents

Gov Slides